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Year-Round Tax Planning: Review Your Credits and Deductions

September 14, 2021

Taxpayers…are you prepared to claim tax credits and deductions? Contrary to popular belief, tax planning is a year-round activity, not just during March and April. Here’s what you should know.

Businesses and individuals…are you up to speed on the tax credits and deductions available to you? We share some helpful info here.

How credits and deductions work

Credits reduce the amount of tax you owe, while deductions reduce the amount of your income before you calculate the tax you owe.

What is the standard deduction?

The standard deduction is a dollar amount that reduces the amount of income on which you are taxed and varies according to your tax filing status. For 2021, the standard deduction is $25,100 for married taxpayers filing jointly, and $12,550 for single taxpayers and married taxpayers filing separately. For many taxpayers that we work with, the standard deduction yields a better result than itemizing.

What does it mean to itemize?

Itemizing means listing out each deduction you qualify for, the sum of which is used to lower your adjusted gross income.

What credits and deductions are available to individuals?

This is not an exhaustive list, but here are some common credits and deductions available to individuals:

Advance Child Tax Credit- Check out our blog, “Are You Eligible for Advanced Child Tax Credit Payments in 2021?” for the details, but essentially, if you have children under age 17 at the end of a calendar year, you could be eligible for a tax credit of up to $3,000 per dependent child on your return (increased from $2,000), or $3,600 for a child under age 6, subject to income limitations.

Earned Income Tax Credit- For 2021, the new law increases the maximum EITC for childless adults, eliminates the age cap for older workers and raises the income threshold, allowing more households to qualify for the credit.

Child and Dependent Care Credit- Check out our blog, IRS Releases FAQs on Child and Dependent Care Credits for the details but if you or your spouse pay someone to care for one or more qualifying persons in order for you to work (or seek work) and your income level falls within the income limits set for the credit, you are eligible for the child and dependent care credit.

Foreign Tax Credit- The foreign tax credit is a non-refundable tax credit for income taxes paid or accrued to a foreign country or U.S. possession if you are subject to U.S. tax on the same income. Alternatively, you may also take an itemized deduction for the foreign taxes.

Meals and Entertainment Deduction- It’s no secret that sometimes the best business deals and conversations happen over lunch, during a round of golf, or on the sidelines of a football game. When it comes to deducting these expenses, the IRS wants to know that business was actually talked about and you weren’t simply enjoying a meal with an employee or client. Read our blog here- Take a Look at the New 100% Business Meal Deduction.

Charitable Donation Deduction- This deduction is available for those who take the standard deduction rather than itemize, and it’s up to $300 per taxpayer. It is an above the line adjustment to income that will reduce a donor’s AGI and therefore reduce taxable income.

Home Mortgage Interest Deduction- Prior to the TCJA, taxpayers could deduct interest on up to $1.1M of home acquisition indebtedness. For 2018-2025, the new law allows taxpayers to deduct interest on up to $750,000 of qualified residence indebtedness if it qualifies as home acquisition indebtedness.

Investment Expense Deduction- When you borrow money to buy assets held for investment, any interest you pay on that loan is called “investment interest expense”. In some cases, you can deduct this expense—see if you qualify by reading our blog, The Investment Interest Expense Deduction.

Medical Expense Deduction- Taxpayers who itemize deductions can deduct qualified out-of-pocket medical expenses that are over 10% of their adjusted gross income for the year. Check out our blog, Tax Reform and the Medical Expense Deduction to learn more.

Plug in electric vehicle credit- You may qualify for a tax credit on your 1040 when you buy an EV. The credit can be up to $7,500 but is subject to a phase-out based on the number of vehicles sold by the manufacturer.

What credits and deductions are available to businesses and investors?

Again, not an exhaustive list, but here are some deductions available for businesses:

Opportunity Zones- The Tax Cuts and Jobs Act (TCJA) introduces a new investment vehicle called Opportunity Funds which help direct resources to low income communities, known as Qualified Opportunity Zones. If you designate capital gains triggered in 2021 towards investing in an opportunity zone fund, you may be able to defer the tax that would come with the sale of your current investments.

Paid family leave credits- Under Section 45S of the Tax Cuts and Jobs Act (TCJA) employers who pay qualifying employees at least 50% of their salary while on family and medical leave (for up to 12 weeks in a year) qualify for a general business credit.

Research and development credit- The R&D Tax Credit allows a federal credit of up to 20 percent of eligible spending for new and improved products and processes.

Business expense deduction- You can deduct interest on business loans if you are legally liable for the debt, both you and the lender intend that the debt be repaid, and you and the lender have a true debtor-creditor relationship. See IRS Finalizes Rules on Business Interest Expense Deduction Limits for more details.

Questions on the deductions and credits available to you? Contact us.

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